Thursday, March 16, 2017

When Congress Whiffed On Reforming The NCAA

Forty years after a sensational investigation, the collegiate sports behemoth remains answerable to no one.

By Ben Strauss 
March 16, 2017

Before college coaches were millionaires, the NCAA basketball tournament became March Madness or ESPN even existed, Congress was serious about reining in the NCAA. It was 1978 and a House subcommittee devoted a year to scrutinizing the nation’s governing body for college sports—specifically, the arbitrary and capricious way it policed its strict amateurism rules. From February through October, lawmakers dragged a parade of NCAA executives to Washington; records were subpoenaed; more than 40 witnesses testified; some 1,500 pages of testimony were produced.

At the center of the hearings was the issue of due process—what rights players under investigation had and whether the NCAA acted fairly as judge, jury and executioner in prosecuting and sentencing them. One football player detailed how he was suspended for three years for receiving a $12 discount on pants. “I have been writing administrative law in this House for more than a quarter century and I have never seen anything even touching upon this kind of inequity in procedure,” said Representative John Moss, the California Democrat who chaired the hearings.

Nearly 40 years later, we are still talking about due process in college sports. The NCAA, a non-profit, privately run, billion-dollar organization that oversees 480,000 athletes today, retains the power to make or break careers, and those accused of running afoul of its rules still have little recourse. Consider Todd McNair, a former assistant football coach at the University of Southern California, who filed a defamation lawsuit against the NCAA, contending its enforcement staff fabricated evidence against him. McNair was fired in 2010 and hasn’t worked in college sports since; a court has ruled he has a probability of winning his case.

An NCAA investigator’s boyfriend, meanwhile, announced on an airplane several years ago that she was going to bust the player she was investigating long before the inquiry was finished. And, this month, Keaton Weisz, a baseball player who transferred to Coastal Carolina University, lost his legal case to take the field this season—despite the support of his old school, Auburn—because the NCAA refused to rule him eligible. A judge initially issued a temporary restraining order so Weisz could play, but then ruled that he was powerless to contradict the NCAA. “As a college athlete, you really have no rights, no ability to contest the NCAA,” said Dick Semerdjian, Weisz’s lawyer. (Donald Remy, the NCAA’s chief legal officer, said the decision was consistent with NCAA transfer rules and Weisz has been granted an extra year of eligibility at the end of his college career.)

But to understand NCAA rules today, you have to go back to those hearings four decades ago, and a blue ribbon congressional investigation that produced nothing but a toothless report—in no small part because of a tarnished star witness.


J. Brent Clark graduated from law school at the University of Oklahoma in 1975, and took a job as an NCAA investigator. The NCAA was a relatively small organization then, based in Shawnee Mission, Kan. It had around 60 employees working under executive director Walter Byers, a former sportswriter who built the NCAA into the power center of college sports in the 1950s. Clark, in his 20s, had boyish features and parted his lank brown hair down the middle. He was an ambitious kid, telling his friends then that he would be the governor of Oklahoma in 10 years. But in December of 1977 Clark abruptly quit the NCAA and was hired by the House of Representative’s Committee on Interstate and Foreign Commerce. Why? One of its subcommittees was investigating the NCAA.

Earlier that year, the NCAA had sought to suspend Jerry Tarkanian, the towel-chomping basketball coach at the University of Nevada-Las Vegas, for recruiting violations. But when UNLV, with the help of Nevada’s attorney general, looked into the charges, it found that the NCAA had threatened and intimidated witnesses in its pursuit of Tarkanian, and that most of the evidence was hearsay. Congressman James Santini, a Democrat from Las Vegas, was irked by the affair. Sixty-eight congressmen signed a letter in support of examining the NCAA and the probe was launched. With Clark’s defection, the subcommittee suddenly had an inside man. A “breakthrough witness,” the press called him.

Clark was the hearing’s first witness in February of 1978. “Give me six weeks and I can put any school on probation,” he dramatically declared. But his claims quickly became more grandiose. He accused Jim Delany, a fellow investigator and now the commissioner of the Big Ten, of accepting “the services of a young lady” and then laying up on an investigation to keep the indiscretion secret. Clark used words like “flesh-peddling” and “bribery” to explain how the enforcement staff worked. It was salacious; the subcommittee also discovered it wasn’t exactly true.

The subcommittee quickly launched an investigation into Clark, and found his testimony was at times “derelict,” “misleading” and “implausible.” In fact, Delany—single at the time—had been set up on a date by a high school basketball player in the course of an investigation, but there was no evidence it had impacted his work. Clark admitted to the committee that despite his provocative word choice he had not meant to imply the woman was a prostitute. He resigned in April, just two months after he testified. “Brent was overzealous,” says Lois Tarkanian, Jerry’s widow and now a city councilwoman in Las Vegas. (When I spoke with Delany about the incident, he vociferously reminded me that Clark had lost his job over the accusations.)

Clark, though, could have stuck with basic facts. NCAA investigators did not tape-record interviews and were found to have made up information to prosecute Tarkanian and others. Players and coaches had no access to the evidence that was used to punish them and they were discouraged from challenging penalties in court. The NCAA’s headquarters was its own fortress of secrets, and it came to light that Byers secretly recorded phone calls—a somewhat Nixonian touch that surely resonated with members of Congress who had only a few years before impeached the president for the same.

Other aspects of Clark’s testimony would prove prescient. He tried to investigate John Wooden’s famed UCLA basketball program, but his superiors obstructed him because, Clark believed, the program was a powerful moneymaker for the NCAA. A few years later, a Los Angeles Times investigation found that for years a booster had been buying UCLA players cars and clothes in violation of the NCAA’s rules.

Clark's sensational testimony also overshadowed other witnesses who testified about their fear of the NCAA. Tarkanian said that as he was investigated, “I began feeling like I was Alice in Wonderland.” Larry Gillard, a Mississippi State football player, recounted his three-year suspension over a $12 pants discount. On appeal, the sentence was reduced to a single season, but Gillard, still feeling persecuted, sued. He lost his case, but in response to the lawsuit the NCAA’s enforcement staff ordered investigators back to Mississippi to look for more infractions. “The NCAA reminds me a lot of the Congress,” said one lawmaker. “The only difference is that we are afraid of our constituents, and it is the other way around with the NCAA.” (A Michigan State football coach pleaded with the subcommittee not to subpoena him to testify. “I feel like it has hurt my future in coaching,” he said.)

When Byers took the stand, he repented nothing. Quite the opposite. He was indignant. “The seeming reaction of you gentlemen is that it is an absurdity to invoke penalties on what, in this town, must seem to be picayune excess aid,” he said. The implication: Congress had trouble understanding the NCAA because it was not accustomed to such discipline, fiscal or otherwise.

In December, the subcommittee released a series of recommendations that included new evidentiary standards for investigators and public transcripts from infractions hearings. The minority’s report, though, included dozens of pages attacking Clark. Norman Lent, a New York Republican, called Clark’s testimony the “darkest moment” of his years on the subcommittee. In the end, the subcommittee decided against federal legislation. No meaningful changes were made. (In the 1990s, the NCAA enforcement staff began tape-recording its interviews and allowing investigated players to have lawyers). “They could have changed a lot about the NCAA,” says Lois Tarkanian. “But they didn’t.” As for her husband, he took his case against the NCAA all the way to the Supreme Court, which ruled against him in 1988, finding the NCAA had no obligation to provide due process. Tarkanian sued again, claiming he had been unfairly harassed by the NCAA, and reached a $2.5 million settlement in 1998.

Clark, meanwhile, went home to Oklahoma, where today he runs a municipal bonds practice in Norman. When I reached him by phone last week, Clark told me that the subcommittee recruited him to join its staff and one of its lawyers had edited his testimony to be more dramatic. He said he had never read the damning reports about him, but that he had no regrets. “I told the truth to the best of my ability,” he said, not wanting to rehash the specifics.

After Byers retired, to the astonishment of many he appeared to atone for his former organization’s heavy-handed ways. He published a memoir in 1995 in which he criticized the NCAA in much the same terms Clark had. Though he never explained his change of heart, Byers called the organization he built hypocritical and exploitative (some attributed the bitterness to the loss of the iron grip he once held over college sports). Clark viewed the book as his vindication. “It showed that in the long run I was right,” he said. “Even Walter Byers agreed with me.”


For decades, the 1978 hearings remained the hardest look Congress—or most anyone else, for that matter—took at the NCAA. But in recent years, as college sports have grown into a more than $10 billion business—nearly as big as the NFL—the scrutiny has returned. Former UCLA basketball star Ed O’Bannon won a high-profile lawsuit against the NCAA when a federal judge determined the association’s rules violated antitrust laws. A regional office of the National Labor Relations Board found Northwestern football players were university employees with collective bargaining rights to negotiate for long-term health care and a greater say over team rules. (The weight of the ruling was vacated on appeal.). Another lawsuit is now winding its way through the courts that seeks to blow up all of the NCAA’s limits on paying players, paving the way for athletes to receive salaries.

Congress, too, has become reengaged. In 2013, Representative Charlie Dent, a Republican from Pennsylvania, introduced a bill calling for a presidential commission on college sports, similar to Gerald Ford’s effort that led to the restructuring of the United States Olympic Committee. House and Senate committees held separate hearings examining college sports the next year. Senator Claire McCaskill (D-Missouri), concerned about the welfare of athletes, pointedly asked NCAA president Mark Emmert, “If you're just a monetary pass-through, why should you exist?”

“It would be a disservice not to understand some of the inequities of college sports,” McCaskill told me. “This is a big money business, and the athletes are used for financial gain, while the NCAA cherry picks infractions. It wouldn’t surprise me that someone was suspended for getting paid for an autograph while at the same time we had multiple gang rapes going on in the Baylor football program. Sometimes I think the NCAA can’t see the forest through the trees.”

In the face of mounting pressure, the NCAA has evolved. To comply with the courts, it increased the value of scholarships by a few thousand dollars so athletes can pay for miscellaneous expenses, like snacks and travel home. Families of players in the Final Four are also now flown to the games—something McCaskill specifically asked about in 2014. “We’ve enhanced the college experience and I think people have noticed,” Remy said, later adding that it is the NCAA's membership—more than 1,100 schools—that collectively make its rules.

The association has also girded itself. In 2014, the NCAA spent $580,000 on lobbying, more than it had spent the previous three years combined, and contracted an outside lobbying firm, Brownstein Hyatt Farber Schreck, for the first time. “Folks may be reading into this more than it deserves,” Remy said. “We brought in an outside firm when we were called on to provide congressional testimony. We reach out to help educate members of Congress about what’s going on in college sports, but we’re not going to anyone with an ask.”

Still, earlier this year a trade group representing athletic directors announced plans to form a Political Action Committee. Headed by former Maryland congressman Tom McMillen, the group, LEAD1, has a gala planned for the Trump International Hotel in Washington this fall. McMillen, too, insists that the effort is more precautionary than anything. Congress, he said, would likely only act if there were a ground-shifting event in college sports, like litigation that forced changes to player pay rules or a nationwide gambling scandal. But McMillen, himself a former Maryland basketball star, doubted whether legislators—those looking to advance the legal rights of college athletes or protect amateurism—have much bandwidth for college sports at the moment. “You have so many other issues right now,” he said. “It’s just not on the radar.”

McCaskill agreed that legislation was not the answer. “Most of my colleagues don’t want to go anywhere this,” she said. But, she added: “The NCAA is accountable to no one. That’s why it’s critical that people in positions of power, like members of Congress continue to ask questions. You can do a lot with oversight, if you’re just willing to kick up a little dust.”

Article Link To Politico:

Rachel Maddow’s Trump ‘Bombshell’ Completely Backfired

By Michael Goodwin
The New York Post
March 16, 2017

Sometimes you eat the bear, and sometimes the bear eats you. Then there’s Rachel Maddow, who stuck her head in the bear’s mouth while talking trash. Chomp!

It wouldn’t be fair to call her Tuesday-night show the TV flop seen ’round the world. It was worse than that. Much worse.

It was a gut-punch embarrassment to Maddow, to MSNBC, to NBC and to all the lefties who bought her afternoon tweet that “We’ve got Trump tax returns.” Were she selling stocks, she’d be busted for running a pump-and-dump scam.

Yet for hours, between her boast and the actual show, Maddow launched a million fantasies. The anti-Trumpers had to be salivating, imagining that the big scoop would finally reveal the president as a tax cheat and liar, a filthy parasite on hardworking taxpayers.

This could be it, the Holy Grail, the silver bullet that finished him. The nation would rise up in disgust, Republicans would jump ship, Trump would be impeached, Vice President Mike Pence would take over, Dems would promptly eviscerate him and presto, the Clinton presidency would be restored!

And all because Maddow got the goods. She would be celebrated as the woman who broke the illegitimate president and saved America from the deplorables and irredeemables.

Because of her, Black Lives Matter would be important again. Transgendered men could pee in little girls’ bathrooms. Never again would terrorism be linked to Islam and saying “America First” would be a hate crime.


The outrage at Maddow on the ­unhinged left, and the mockery of her among sensible people, is that her sin went far beyond delivering a dud. She assembled an audience only to deliver a great gift to Trump.

Her scoop, courtesy of journalist David Cay Johnston, was two pages from Trump’s 2005 federal return. It showed income of $153 million, and a tax payment of $38 million.

That works out to a rate of about 25 percent, higher than the rate paid in recent years by MSNBC parent Comcast, tax hiker Barack Obama, socialist Bernie Sanders and Warren Buffett, among others.

Maddow made Trump a good guy. One can only imagine her anguish that the truth was able to emerge.

Her hoax is the kind that validates Trump’s claims of fake news. The hostility to him is blinding otherwise intelligent people to facts, and they recklessly rush through red lights.

Imagine what was going on with Maddow’s producers and staff. Did anyone dare say to her that we have a problem, that the tax return you’re boasting of actually shows Trump to be a billionaire who pays his fair share?

That’s not what anybody wanted. They came to bury Trump, not to praise him. And so they tried, and failed.

Heaven forbid that, faced with the facts it had, MSNBC would do the story the facts told. Not a chance. Trump must be savaged, truth be damned.

Beyond the obvious reputational damage, the episode is serious for another reason, too. Leaking someone’s tax returns is a crime, one Maddow celebrated because the victim is Trump.

But the rule of law can’t survive if enough people holding prominent positions believe the end justifies the means. It opens the door to endless conflict, and closes any hope of uniting our polarized nation.

Article Link To The New York Post:

The Media Hides Its Own Disapproval Rating

By L. Brent Bozell and Tim Graham
March 16, 2017

The latest poll by USA Today and Suffolk University carried some eye-opening numbers about public disapproval of the media's aggressive attempts to run the country. It found that President Trump has a 47% approval rating and that 44% disapprove of him.

That's not surprising. The media talk about his unpopularity all the time.

But here's what they don't talk about: their own numbers. Only 37% of Americans have a favorable opinion of their job performance. A whopping 50% have an unfavorable opinion.

Look at the numbers by party identification. Republican unfavorable opinion of the media? It's 78%. Only 10% have a favorable opinion. The Democrats are the opposite: Sixty-nine percent hold a favorable view, and 19% hold an unfavorable view.

The pollsters offered other media questions, asking: "President Trump has said journalists and the media are the enemy of the American people. Do you agree or disagree?" That's an exaggerated question. Trump's actual tweet accused only ABC, CBS, CNN, NBC and the "failing" New York Times of being "fake news" and the "enemy of the American people."

Many conservatives would steer clear of saying that journalists (liberal media and conservative media) are the enemy of the people and stick with chief White House strategist Steve Bannon's take that the media are the "opposition party" to Trump. But even so, 64% of Republicans in the poll agreed with Trump, and only 29% disagreed. Democrats sided with their liberal-media buddies, 88% disagreeing and 9% agreeing.

These pollsters also asked the public which statement they agreed with, "President Trump is right when he says the news media is unfair and biased against him" or "The news media is right when they say they are appropriately holding the White House accountable."

This result clearly demonstrates how divided the country is on the media under President Trump. Seventy-nine percent of Republicans agree with Trump, and 12% disagree. Democrats align with the media's sudden rush to "accountability," 86% disagreeing and 7% in agreement.

Both sides know the media are liberal.

These results were submerged in USA Today. The front-page story on the overall poll was headlined "Temperament and tweets tripping up president." Reporter Susan Page began saying, "President Trump gets high marks for leadership amid growing economic optimism, a new USA TODAY/Suffolk University Poll finds, but questions about his temperament and his tweets have cost him the political boost that a president traditionally gets from that good news."

Page also underlined that his 47% approval rating makes him "the first president in modern times not to score majority approval at this early point in his tenure." Fifty-nine percent would like Trump to turn down the tweeting, but even we've made that recommendation.

The poll questions about the media finally make a brief appearance 23 paragraphs deep in the story but without the partisan breakdown. Page says: "Meanwhile, Trump's attacks on reporters divide Americans: 42% say he is right when he says the news media are unfair and biased against him; 48% say the news media are right when they say they are appropriately holding the White House accountable. Are the news media 'the enemy of the American people' as the president has asserted? One-third of Americans, 34%, agree with him. Fifty-nine percent disagree."

The media's rating of 37% favorable and 50% unfavorable was left out.

The newspaper industry is declining, as USA Today surely knows: Gannett split into two companies in 2015, one for broadcasting and one for the less profitable print business. It is interesting to watch elite newspapers in the Trump era doubling down on the liberal-activist course. There's a reason half the country no longer cares to read them.

Article Link To IBD:

Big Win For Automakers As Trump Orders Fuel Economy Standards Review

By Nick Carey and David Shepardson 
March 16, 2017

President Donald Trump on Wednesday ordered a review of tough U.S. vehicle fuel-efficiency standards put in place by the Obama administration, handing a victory to auto industry executives and provoking criticism from Democrats and environmental groups.

In a move widely seen as a preamble to loosening fuel standards, Trump told an audience of cheering union workers, he would "ensure that any regulations we have protect and defend your jobs, your factories," and promised he would encourage growth in the U.S. auto sector.

"The assault on the American auto industry is over," Trump said, standing in front of a banner that read "Buy American-Hire American."

Trump added that the White House is "setting up a task force in every federal agency to identify and remove any regulation that undermines American auto production."

The backdrop and message underscored Trump's efforts to lock down support in industrial states such as Michigan that put him in the White House. Trump spoke at the site of the former Willow Run bomber factory in Ypsilanti, Michigan, which won fame for building an operational B-24 heavy bomber every 59 minutes during World War Two. Now, the site is being redeveloped as a testing ground for autonomous vehicles.

At a roundtable with industry leaders Trump made clear he expected automakers to hire more Americans in return, a theme that dominated his election campaign.

"We're going to do some wonderful work with you, but you're going to have to help us with jobs," he said.

Trump's event was attended by around 1,000 people, including automotive executives, United Auto Workers union President Dennis Williams - who sat next to Trump - and workers from Detroit's "Big Three" automakers: General Motors Co (GM.N), Ford Motor Co (F.N) and Fiat Chrysler Automobiles NV (FCA) (FCHA.MI) (FCAU.N). Automakers lined up examples of vehicles they build in the United States for the president to see.

Auto industry executives have said they are hopeful the Trump administration will pursue tax and regulatory policies that would benefit U.S. manufacturers.

Reopening the fuel efficiency rules put in place by Democratic President Barack Obama days before he left office is one of the top items on the industry's agenda. Automakers, through their lobbying groups, have said the Obama rules were too expensive and could cost American jobs.

"These standards are costly for automakers and the American people," said Environmental Protection Agency Administrator Scott Pruitt.

After one participant in Wednesday's meetings mentioned environmental concerns, Trump said he agreed but did not want an "extra thimbleful of fuel" to get in the way of growth.

In a meeting with top auto executives from U.S. and foreign automakers, Trump said the government needs to get out of the way of the auto industry building vehicles, a person who attended the meeting said.

Automakers are wary of being seen as out of touch with environmental concerns, or unwilling to invest in new technology. Ford, for example, used its Twitter account on Wednesday to highlight previously announced commitments to develop electric vehicles.

It could take a year for the review process to play out, and Wednesday's event was effectively a starting gun for intense lobbying efforts over how government policy will drive technology investment decisions in the auto sector.

Critics like Democratic U.S. Senator Edward Markey of Massachusetts said Trump's move could hurt consumers.

"Filling up their cars and trucks is the energy bill Americans pay most often, but President Trump's roll-back of fuel economy emissions standards means families will end up paying more at the pump," Markey added.

The president is not seeking to revoke California's authority to set vehicle efficiency rules even stricter than federal rules, including mandated sales of electric vehicles, as part of this move, a White House official said. The official did not rule out seeking to withdraw California's authority in the future. Pruitt, an ally of the fossil fuel industry, would not commit during his Senate confirmation hearing to allowing California to continue its own clean vehicle rules.

A group of 10 state attorneys general led by California and New York said on Wednesday they would fight attempts to weaken the rules.

California’s attorney general late Tuesday filed legal papers in a federal court defending the Obama administration’s decision to finalize the determination in January.

Barclays auto analyst Brian Johnson said in a research note that he expects the Trump administration review will lead to reductions in planned hikes in fuel efficiency standards after 2021.

The Obama administration's rules, negotiated with automakers in 2012, were aimed at doubling average fleetwide fuel efficiency to 54.5 miles per gallon by 2025, although the real-world mileage figures would be lower.

'Thoughtful And Coordinated'

Automotive industry executives and lobbying groups were quick to praise the administration's announcement.

"The Trump administration has created an opportunity for decision-makers to reach a thoughtful and coordinated outcome predicated on the best and most current data," said Mitch Bainwol, chief executive of the Alliance of Automobile Manufacturers, an industry lobbying group.

Automakers have signaled they want the government to give manufacturers more credit toward achieving fuel efficiency targets for technologies such as "stop-start" systems that shut down a car’s engine at a traffic light.

Regulators should also look at whether ride hailing and vehicle-to-vehicle communications systems designed to prevent accidents and alleviate road congestion could be counted toward the industry’s greenhouse gas emissions goals, the automaker group proposed in comments to the EPA last year. The group represents a dozen automakers, including GM, Ford and FCA.

Under the 2012 agreement with the industry, the EPA was given until April 2018 to decide whether the standards were feasible under a "midterm review," but the agency moved up its decision to a week before Obama left office in a bid to maintain a key part of his administration's environmental legacy.

An EPA analysis indicated that compared with previous rules, the 2025 standards would result in savings of between $1,460 and $1,620 over the lifetime of a vehicle and payback for new technology required to meet the new standards of around five years.

The Obama administration said the rules would cost the auto industry $200 billion over 13 years, but save motorists $1.7 trillion over the life of the vehicles.

Article Link To Reuters:

Musk Goes Back To Wall Street To Bring The Model 3 To Market

Capital raise to cushion balance sheet before sedan’s debut; Musk said company was ‘close to the edge’ without raising cash.

By Dana Hull and David Welch
March 16, 2017

Elon Musk needs to raise at least $1.15 billion more to bring his more affordable Model 3 to market. His believers, along with investors who buy into the vision of Tesla Inc., could hardly be happier.

After burning through cash in late 2016 and warning Wall Street that the company was “close to the edge,” Tesla announced Wednesday that it would sell new stock and convertible securities while preparing for volume production and deliveries of its first mass-market car later this year.

News of a big stock sale typically depresses a company’s share price because it dilutes the value of investors’ holdings. But this is Musk, whose vertically integrated clean-energy company has captured imaginations on and off Wall Street even as the Palo Alto, California-based company has struggled to be profitable. Instead of falling, Tesla stock rose in late trading.

The proceeds from Tesla’s offering of $250 million in shares and $750 million in convertible debt will be used to strengthen its balance sheet and reduce risks associated with introducing the Model 3 sedan, Tesla said in a statement. The Model 3, scheduled to start production in July, will start at about $35,000 before incentives and is smaller than the Model S.

The offering will cushion the balance sheet of the youngest publicly held U.S. automaker, which is ramping up spending ahead of the Model 3’s arrival. Tesla burned through $970 million in the fourth quarter and expects as much as $2.5 billion in expenditures during the first half of 2017. If anything, the size of the capital raise is smaller than many analysts had expected.

“We would not be surprised to see the raise upsized as we expect the company could use the capital, especially as it enters full ramp of the Model 3,” said Colin Rusch, an analyst at Oppenheimer & Co. “We would be encouraged to see the company raise closer to $2 billion.”

The offering is expected to price on Thursday after the market closes, according to a person familiar with the process. Tesla was up 2.5 percent to $262.14 late Wednesday.

While raising cash isn’t critical to releasing the Model 3, it would probably be wise, Musk said on the Feb. 22 earnings call. Tesla has reported losses in all but two quarters since its inception.

On the Edge

“According to our financial plan, no capital needs to be raised for the Model 3, but we get very close to the edge,” the chief executive officer told analysts on the call. Since “that’s probably not the best thing for shareholders,” Musk said, “it probably makes sense to raise capital to reduce the risk.”

Musk, 45, is Tesla’s chairman and largest shareholder, with a 20.8 percent stake. He’ll participate in the capital raise by purchasing $25 million of common stock, the company said.

The billionaire has borrowed for years from Tesla underwriters including Goldman Sachs Group Inc. and Morgan Stanley. Tesla’s prospectus shows Musk has a $344.4 million loan from Morgan Stanley. He has also borrowed $279.9 million from financial institutions that aren’t involved in the company’s offering and are secured by a portion of Tesla stock, the company said.

Model 3

The Model 3 is the key to Musk’s push to reach mainstream consumers. At last count, Tesla had roughly 373,000 reservations for the vehicle. The company’s $41 billion market value makes it almost as big as Nissan Motor Co. and not far off from Ford Motor Co., rival automakers that sell millions of cars a year.

Tesla produced almost 84,000 vehicles in 2016 and plans to make half a million in 2018, then 1 million in 2020. It expects to deliver as many as 50,000 vehicles in the first half of this year, before ramping up Model 3 production to more than 5,000 a week in the fourth quarter.

Goldman Sachs, Deutsche Bank AG, Citigroup Inc. and Morgan Stanley are leading the stock offering, Tesla said in its prospectus. The automaker has granted underwriters a 30-day option to purchase an additional 15 percent of each offering. The company last tapped bond markets in 2014, when it sold $2 billion of convertible notes to help fund its “gigafactory” for battery production east of Reno, Nevada, according to data compiled by Bloomberg.

“Bears will likely say the deal is too small,” Ben Kallo, an analyst at Robert W. Baird & Co., said in a note. “We believe this displays Tesla’s confidence in the Model 3 timeline and anticipate shares will move higher.”

Article Link To Bloomberg:

European Markets Higher; Focus On Central Banks

March 16, 2017

Markets in Europe were higher on Thursday following the U.S. Federal Reserve announcement of a new rate hike.

The pan-European Stoxx 600 was 0.35 percent higher with most sectors trading in positive territory with the FTSE 100 hitting a record high of 7,418.

Basic resources led the gains up by 2.16 percent after news that Indian tycoon Anil Agarwal is making a personal bet on Anglo American worth up to 2 billion pounds. Most of the best-performing stocks in early deals belonged to the sector with Anglo American up by 10 percent, Fresnillo higher by 6 percent and Antofagasta up by 5 percent.

The German airline Lufthansa moved up by 4 percent in early deals after reporting earnings of 1.75 billion euros last year, in line with forecasts. However it added that it expects profits to fall slightly in 2017.

By contrast, the French Renault was down by nearly 4 percent after regulators said that Carlos Ghosn, the head of the firm, should be held responsible in current diesel emission cheating investigations.

Central Banks

Fed chair Janet Yellen hiked rates by 25 points on Wednesday evening but signaled no pick-up in the pace of normalization of rates.

Meanwhile, in Japan, the Central Bank said Thursday morning it was keeping its rates unchanged and the People's Bank of China raised its short-term interest rate by 10 basis points on both medium-term lending facility loans and its open market operation reverse repurchase agreements.

Nonetheless, on Thursday, investors will be looking at Norway's and the U.K.'s central banks for their latest rate decisions.

Looking at politics, voters in the Netherlands headed heavily to the polls to choose their next prime minister. According to exit polls, the center-right Mark Rutte defeated the anti-immigrant and anti-establishment Freedom Party. However, analysts warn it could take months before Rutte manages to form a coalition government.

Emmanuel Macron, the current frontrunner in the French presidential election, is set to meet Chancellor Angela Merkel at 2 PM London time.

Article Link To CNBC:

Oil Prices Extend Gains After Drop In U.S. Stockpiles

By Aaron Sheldrick 
March 16, 2017

Crude oil prices rose on Thursday to extend gains from the previous session after official government data showed U.S. stockpiles had eased from record highs.

Prices surged on Wednesday after a slew of market reports and official data offered some hope that a near three-year global glut in oil is coming to an end, albeit more slowly than many have anticipated.

The market was also buoyed after the Federal Reserve raised interest rates in line with expectations but did not signal any pick-up in the pace of further rises.

U.S. West Texas Intermediate (WTI) crude was up 39 cents, or 0.8 percent, at $49.25 a barrel, having surged 2.4 percent in the previous session while posting its first increase in eight days.

Brent futures climbed 47 cents, or 0.9 percent, to $52.28. They had their first increase in seven days on Wednesday, gaining 1.7 percent.

The benchmarks have bounced off their lowest levels since the Organization of the Petroleum Exporting Countries (OPEC) agreed to cut output at the end of last year, with an initial price surge having evaporated as stockpiles remained high.

Global oil inventories rose for the first time in six months in January, despite the OPEC agreement, the International Energy Agency said in its monthly oil report on Wednesday.

But data from the U.S. Energy Information Administration (EIA) showed U.S. crude stocks fell last week, the first weekly decline after nine straight increases.

Crude inventories fell 237,000 barrels in the week to March 10, contrary to analysts' forecasts for an increase of 3.7 million barrels.

The inventories have been closely watched by oil traders to see whether the OPEC reduction is reducing the global glut.

"While the large (global) inventory build seems counter-intuitive given the cuts to OPEC supply, there are good reasons for this," Bernstein Energy said in a note on Thursday, citing seasonal declines in demand, time lags between cuts and deliveries, and traders tapping floating storage.

Oil bulls were also encouraged after the IEA said demand should overtake supply in the first half of this year.

The market as well has been impressed with OPEC's level of compliance with the cuts and these are likely to hold, BMI Research said.

"There are early signs that March compliance will also be strong and could even exceed the previous two months," BMI said.

Article Link To Reuters:

China, Saudi Arabia Eye $65 billion In Deals

By Ben Blanchard
March 16, 2017

Saudi Arabia's King Salman oversaw the signing of deals worth potentially $65 billion as he began a visit to Beijing on Thursday, as the world's largest oil producer looks to cement ties with the world's second-largest economy.

The octogenarian monarch, who has overseen the launch of an ambitious economic reform plan since his accession two years ago, is on a month-long Asian tour.

The visits to countries that are some of world's fastest growing importers of Saudi oil aim to promote investment opportunities in the kingdom, including the sale of a stake in its giant state firm Saudi Aramco.

Saudi Arabia has sought to boost oil sales to China, the world's second-largest oil market, after losing market share to Russia last year, by working mostly with China's top three state oil firms.

Chinese President Xi Jinping told Salman in Beijing's cavernous Great Hall of the People that his visit showed the importance he attached to relations with China.

"This visit will push forward and continue to improve the quality of our relations and bear new fruit," Xi said in comments in front of reporters.

'Old Friends'

Deputy Chinese Foreign Minister Zhang Ming said the memorandums of understanding and letters of intent were potentially worth about $65 billion, involving everything from energy to space, but he did not give details.

"President Xi Jinping and King Salman are old friends," Zhang said. "Practical cooperation between China and Saudi Arabia has already made major achievements, and has huge potential."

For Saudi Aramco, the potential investments fit with its strategy to expand its refining and chemicals portfolio in its bid to diversify assets and secure long-term agreements for its oil. An MoU with state-run Norinco will look into building refining and chemical projects in China, while Saudi Basic Industries Corp 2010.SE (SABIC) and Sinopec have agreed to develop petrochemical projects in China and Saudi Arabia. The Norinco deal could involve exploring the possibility of a greenfield refinery and chemical plant in Panjin, Liaoning province, while also upgrading an existing refinery and petrochemical facility in the same location, an industry source said. Sinopec and SABIC, one of the world's largest petrochemical companies, jointly run a refinery in Tinajin.

'Honest Broker'

China has traditionally played little role in Middle East conflicts or diplomacy, despite its reliance on the region for oil. But it has been trying to get more involved in efforts to end Syria's six-year-old civil war, where Riyadh supports rebels battling President Bashar al-Assad.

Last year China also offered support for Yemen's government, which is backed by a Saudi-led Gulf Arab coalition in a war against the Iranian-aligned Houthi movement that controls much of the country.

Zhang said both the Yemen and Syria crises were discussed by Salman and Xi, and both leaders agreed that these issues must be resolved politically via talks.

China has had to tread a careful line, though, as it also has close relations with Iran. Xi visited both Saudi Arabia and Iran in January last year.

Next week Israeli Prime Minister Benjamin Netanyahu visits China.

One Beijing-based diplomat from a Muslim-majority country told Reuters that China was trying to play the role of "honest broker" in the Middle East, as it lacks the historical baggage of the Americans or the Europeans.

"China does not take sides and that is appreciated," said the diplomat, speaking on condition of anonymity.

Article Link To Reuters:

Wilders Defeat Is No Reason For Complacency

By Leonid Bershidsky
The Bloomberg View
March 16, 2017

Geert Wilders' larger than expected defeat in Wednesday's Dutch election sets up a disappointing year for nationalist populists, who only last year appeared to have centrist elites on the run. But while it's fine to celebrate Dutch good sense, it's also useful to keep in mind that the problems that nearly handed Wilders a win are not going away.

A year ago, Wilders' anti-immigrant, anti-European Union party, PVV, appeared poised to win a large plurality in the election despite having just one member (Wilders) and no local political offices or campaign machine. It was almost certain even then that Wilders wouldn't get a chance to govern, since other big parties had refused to cooperate with him after a minority cabinet's failed attempt to work with the PVV in 2011. His election victory, however, would have further energized fellow nationalists in France, Germany and Italy, already encouraged by Brexit and Donald Trump's election.

Now that Wilders, according to exit polls, barely managed to win a tie for second place and only 19 seats in the 150-member parliament, that can hardly be held up as an inspiring example; being beaten by Prime Minister Mark Rutte, a center-right politician known for his tendency to flip-flop, is a particular humiliation for the Dutch nationalist, one of the pioneers of the global nationalist movement.

From a practical rather than symbolic point of view, the Dutch parliament will have an almost two-thirds pro-EU majority. Given the Netherlands' strong economic ties with the U.K., that's a post-Brexit vote of confidence on the union and in Germany, the country's biggest trading partner. Essentially, old centrist parties and the surging GreenLeft, propelled to a strong performance by its young, charismatic leader, Jesse Klaver, can simply ignore the minority that either wants the Netherlands out of the EU or demands major reforms of the bloc.

The high turnout that helped Rutte to victory shows that a populist threat can mobilize voters more or less happy with the status quo. It's a good sign for the second round of the French presidential election in May.

Still, it's useful to remember how Rutte won this election. This political chameleon successfully invaded Wilders' territory by demanding that Muslim immigrants "act normal or leave." He sealed his advantage by flying into battle with Turkish President Recep Tayyip Erdogan, who wanted the Netherlands to open its doors to his proxies campaigning ahead of an April referendum designed to hand Erdogan dictatorial powers. The unceremonious removal of one of the proxies, a female Turkish government minister, from Dutch territory was a Wilders-style move -- only Rutte, unlike his populist rival, could actually make it because he had the executive power.

The new Dutch parliament will not have a pro-immigration or pro-immigrant majority. Anti-immigration sentiment runs deep in Dutch society; I saw it on a recent trip to cover the election campaign. It's not a flash-in-the-pan protest, a chance wind in Wilders' sails. A number of other parties, including Rutte's VVD, are in favor of tighter immigration controls and a more demanding approach to integrating newcomers, which would make it harder for Middle Easterners and North Africans to keep their Muslim identity. Multiculturalism -- or the uniquely Dutch version of it that cultivates indifference to how other distinct communities live -- is out.

The pro-immigration Dutch left, and its boy wonder Klaver, is talking about making sure foreign-born people feel they're part of society. That, too, requires more than the time-honored live-and-let-live approach. There's a divide between lighter- and darker-skinned Dutch that needs a conscious effort to bridge, and while centrist and leftist forces can celebrate their collective victory over Wilders, they don't agree on how to fix the underlying problem. Immigrants themselves won't help them much: They are not inclined to trust any politicians, even those from their own midst. That explains the poor showing of the immigrant-led DENK Party.

The worst thing that can happen is that the integration problem will be swept under the rug in the wake of the Wilders defeat. If so, in the next election cycle it may resurface in the form of a less extravagant and more electorally attractive far-right challenge. The right-wing intellectual Thierry Baudet, who only formed his party last September, managed to get into parliament on Wednesday; there's a lot of room for universally acceptable politicians on that flank, and plays will be made for the space.

Brexit and Trump made many people worry that all rules are out the window and the populist wave is unstoppable. Continental Europe's electoral systems, however, are designed to blunt radical challenges to level-headed leadership. The political fragmentation and the better representation it provides is in itself a powerful obstacle to the success of Wilders, Marine Le Pen's National Front in France or the AfD in Germany. It's an advantage the continental democracies have over the U.S. and the U.K., and it may be enough to protect the centrist status quo this year. But changing demographics in Europe means centrist politicians can't count on it for many election cycles to come. As a reminder, Wilders tweeted last night: "Rutte is not rid of me yet."

It will take a clear new understanding of the EU's functions and potential in order for pro-EU forces to keep winning. A lot will depend on how the EU handles Brexit: The Dutch may be turned away by a punitive approach on the bloc's part and encouraged to consider the Nexit option if the U.K. does well initially as a standalone nation-state.

It will also take progress on integration -- or consensus on tougher border policies -- to take the immigration issue off the agenda for the next elections, not just in the Netherlands but throughout Europe. If none of this happens, not much stands between Europe and Trump-style upheavals.

Article Link To The Bloomberg View:

It's Time To Hit Pause On China Panic

By Tom Orlik
The Bloomberg View
March 16, 2017

China’s National People’s Congress, which concluded on Wednesday, didn’t do much to ease the main worry about the world’s second-biggest economy: its large and growing pile of debt. In fact, to keep GDP growth ticking over at 6.5 percent or more, Chinese Premier Li Keqiang pledged a 12 percent expansion in credit this year. That implies about $2.7 trillion in new lending – larger than the U.K.’s GDP.

That’s not as troubling as it sounds, however. The reality is that China is a big economy, with a substantial stock of existing borrowing and a valid need to borrow more if it’s to prevent demand sputtering out. No one should be surprised China’s borrowing needs in 2017 look to be immense. They’ll be even larger in 2018, and bigger still in 2019.

Indeed, it would be more worrying if China suddenly stopped borrowing so much. True, Chinese leaders should kick the habit of rolling over non-performing loans and instead kill off more zombie companies, especially in the state sector. Shock treatment, however, wouldn’t result in a more dynamic industrial sector or more efficient banking system. More likely, a sudden halt to lending would lead to an economic collapse and financial meltdown -- with global implications.

As People’s Bank of China deputy governor Yi Gang noted on the sidelines of the NPC, before China can deleverage it first needs to stabilize leverage. Whether or not it's doing so is the relevant metric to judge China’s progress. And against that yardstick, it’s not doing that badly.

At the end of 2015, credit growth was expanding about 14.4 percent a year. Nominal GDP growth measures the economy’s ability to generate income to repay borrowing. Back then, with China in a deflationary slump, nominal growth came in at just 6.4 percent. In other words, China was taking on credit more than twice as fast its ability to repay it -- an unsustainable trajectory.

Now, though, the picture looks a little less bleak. While credit growth had edged above 15 percent by the end of last year, nominal GDP growth had accelerated to 9.6 percent. Such a path is still unsustainable, but less so than before. In 2017, with producer prices rising at a rapid clip and monetary policy a shade tighter, it’s likely nominal growth will be a little faster and credit growth a little slower.

To put it another way, the big message of the NPC isn’t that China’s doubling down on an unsustainable strategy. It’s that the economy’s debt load may be edging toward a more manageable trajectory.

To be sure, plenty could happen to knock China off course. At home, a slowing real estate market could eat away at demand. Auto sales have swung into reverse, after the government lifted tax incentives for buying new cars.

And the real risk comes from a man that had to wait until the end of the NPC for a mention: U.S. President Donald Trump. In his closing press conference, Li noted the potential costs of a trade war and expressed confidence that one could be avoided.

In the still-early days of the new U.S. administration, there are many hints about the direction of China policy, but little certainty. Not all scenarios are unfavorable. The U.S. economy is already running hot, for instance, with unemployment back to pre-crisis levels. If a trade war is indeed avoided, U.S. demand should drive stronger Chinese exports. While a Fed rate hike and a strong dollar would make it harder to handle the yuan, those stresses would be bearable as long as exports continue to prop up growth.

Other possibilities are darker. A Trump administration could impose comprehensive controls on China’s exports. In an extreme scenario, the 45 percent tariff Trump touted on the campaign trail would hammer China’s overseas sales and knock 0.7 percentage points off GDP growth. To offset that, the government would have to expand credit even more than it already is. And even if that extreme threat never materializes, U.S. policy could still turn Chinese exports from a growth boost to a burden.

Add Fed tightening to the equation and the stresses on China could really pile up. The PBOC would face an unpalatable choice. It could raise rates to offset a falling yuan, further undermining the real economy. Or it could keep rates low to buoy growth, at the risk of a sliding yuan and renewed capital outflows. That would drain funding from the financial system.

The buzzword for China’s leaders in 2017 is stability. Despite some scary credit numbers, the current trajectory puts them on track to achieve it. Trump, though, could still blow China off course.

Article Link To The Bloomberg View:

Fed Rate Moves Could Spell End To Asian Easing

By Vidya Ranganathan 
March 16, 2017

The long cycle of falling interest rates in Asia could be over after the U.S. Federal Reserve's third rate rise in 15 months was followed quickly by monetary tightening in the world's second-biggest economy, China.

The Fed's widely anticipated rise of 25 basis points on Wednesday was also only its third since the global financial crisis, having reined in earlier temptations to raise rates out of concern for the impact on fragile emerging economies that still needed looser monetary conditions.

But the Fed signaled again that such reticence is over, repeating its projections for at least two more rate rises this year as the U.S. economy strengthens. (For a graphic on Fed's target rate and future projections click

"At the very least, the Fed's desire to step up the pace of policy normalization has changed the conversation at many central banks globally," said Sean Callow, an economist with Westpac in Sydney.

"Further monetary easing is now largely seen as only if needed to 'break the glass', not a plausible baseline."

The People's Bank of China promptly raised the rates on the short-term funding operations it conducts for the country's banks for a third time this year on Thursday.

The Fed's move would otherwise make it harder for China to stop its currency weakening and arrest a persistent outflow of capital. China also wants to cool a run-up in debt and the risk of a property bubble.

The Bank of Japan (BOJ) announced the verdict of its regular policy meeting on Thursday, opting to stand pat with its 0.1 percent short-term interest rate target and a loose commitment to keep buying bonds, though core inflation is far below its ambitious 2 percent target. (For a graphic on Asian central bank policy rates click

Some analysts expect the BOJ will in due course have to raise its zero percent yield target for 10-year Japanese government bonds.

Broader evidence of the shift in central bank thinking will be on hand later in the day as central banks in Indonesia, Norway, Switzerland and Britain review policy.

The Currency Challenge

The Fed's new policy path is a sea change for global markets used to a decade of easy money. And while emerging markets are showing some signs of strength, with a recovery in commodity prices and growth in exports, they are struggling to fire up domestic demand.

But their freedom to fit domestic rates to local demand conditions is constrained by the need to keep hold of the foreign capital that flooded in seeking higher yields when developed world rates were at rock bottom. And they also need to prevent their currencies from tumbling against a rallying dollar.

"Even if domestic conditions warrant a cut, fears about exacerbating financial market volatility will keep central banks cautious," said Tim Condon, ING's chief Asia economist. "It definitely complicates life for those central banks that either needed to or wanted to cut rates."

Condon was expecting Indonesia's central bank to cut rates twice this year, but says he is now "uneasy" about that call.

"To the extent that U.S. rate hikes do put pressure on Asian central banks to tighten policy, it will be through currency movements," Gareth Leather, senior Asia economist at Capital Economics, said in a note.

Emerging markets have already had a dress rehearsal for such circumstances in 2013, when the threat of Fed policy tightening triggered a "taper tantrum" of volatility, prompting central banks in India, Indonesia and elsewhere to defend their currencies via higher rates.

South Korea is also juggling competing pressures. Its policy rates are barely above the Fed's, it wants to avoid unsettling a highly indebted housing sector, but it also has a huge amount of foreign money in its bond market that could take off for greener pastures.

The Fed's raise was not the only piece of news that could encourage the world's central banks to a firmer stance.

Elections in the Netherlands, where the anti-EU party of Geert Wilders won fewer seats than expected, came as a relief to markets, though next month's presidential election in France is still hanging over the continent, with the far-right Front National candidate Marine Le Pen showing strongly.

For Switzerland, uncertainty has the opposite effect on its safe-haven currency, driving it higher despite negative interest rates.

The Swiss National Bank is not expected to change its rates later in the day. Its negative rate policy, in place since 2015, is aimed at curbing demand for the currency in a period of destabilizing elections across Europe that could boost anti-establishment parties.

The Norwegian central bank, while keen to start raising rates, is likely to keep rates on hold, too, after a tumble in inflation as it worries about a strong currency.

The dilemma for the world's central banks is that markets driven by the Fed's lead will force them to respond, regardless of domestic conditions.

Callow at Westpac said the domestic logic, "in any country or zone where wages growth is weak and core inflation not on a clear self-sustaining uptrend", would otherwise be to ease policy.

"Which is actually most of the world," he said.

Article Link To Reuters:

Fed Rate Hikes + Low Growth = Recession

One analyst has pessimistic view of Fed’s latest move.

March 16, 2017

The Federal Reserve on Wednesday lifted benchmark interest rates for only the third time in about a decade, and that has caused trepidation among some market participants.

Lance Roberts, chief investment strategist at Clarity Financial, makes the case in one chart that raising interest rates off ultralow levels during a period of tepid economic growth coincides with recessions in the following three to nine months (see chart below, which compares real, inflation-adjusted, GDP to Fed interest rate levels).

The Fed lifted key rates by a quarter-point Wednesday to a range of 0.75% to 1%. The rate increase comes as the U.S. economy has been growing at a lackluster pace. Government data show that gross domestic product—the official report card of economic performance—was growing at a seasonally adjusted pace of 1.9% in the fourth quarter compared with 1.6% in 2016 and 2.6% in 2015.

“Outside of inflated asset prices, there is little evidence of real economic growth, as witnessed by an average annual GDP growth rate of just 1.3% since 2008, which by the way is the lowest in history since…well, ever,” Roberts wrote in a blog post March 9 (see chart below):

Woeful productivity, defined as the average output per hour of work, has been another bugaboo for economists and the Fed, for the past six years. Higher rates could exacerbate both problems, especially since corporations tend to benefit when borrowing costs are low.

Roberts told MarketWatch in a recent interview that the “Fed lifts interest rates to slow economic growth and quell inflationary pressures.” He argues that outside of a stock market that has been mostly zooming higher, “economic growth is weak.”

On Wednesday, the Dow ended 0.5% higher, the S&P 500 closed up 0.8% and the Nasdaq Composite climbed 0.7%, after the Fed raised rates, as widely expected, citing progress in the economy.

The Fed in its policy statement pointed to an improving labor market and greater confidence among consumers and businesses, but acknowledged that there hasn’t been a substantial change in economic conditions, which have improved, albeit unspectacularly.

“I think what we want to have is confidence in the economy’s trajectory, a sense that the economy will make progress, that we are not overly worried about downside risks and adverse shocks that could hit the economy, that could quickly after setting it off on the path to shrinking the balance sheet gradually over time, cause us to want to begin to add monetary-policy accommodation,” said Yellen during a Wednesday news conference after the Fed decision. She also said the Fed wants to lift rates from near-zero levels to provide more cushion should any major shocks occur, providing the central bank more tools to respond.

Members of the U.S. central bank have been heartened by inflation rising to around 2%, the target level for the Fed, viewed as healthy for most developed economies. But some inflation gains were pegged to volatile oil prices CLJ7, +1.31% and food. Job growth, among a number of economic reports, also has been rosy, with the report for February showing an increase of 235,000 in President Donald Trump’s first full month in office.

In part, the Fed is normalizing monetary policy—in other words, yanking it higher from superlow levels—ahead of any fiscal stimulus measures that Trump has promised to implement. Trump has proposed a raft of new legislation, including tax cuts, an increase in infrastructure spending and deregulation, which could boost the economy and leave the central bank flat-footed with the threat of inflation moving well ahead of its target.

Trump’s pledges, so far, have been bullish for the equity market. The Dow Jones Industrial Average has climbed 14.3% since the Nov. 8 election; the S&P 500 index returned about 10.6% during that period, and the Nasdaq Composite Index has added more than 13%.

However, Roberts fears that equity prices could come tumbling down, ending a placid streak in the market, as higher borrowing costs for corporations and individuals—pointing to increases in everything from higher costs to buy a house or car to the elevated costs of companies repurchasing their own stock—aggravate lackluster growth.

To be sure, not everyone agrees with this pessimistic view. Indeed, quite the contrary for economists at Goldman Sachs, who believe that the Fed may be lagging behind economic indicators like inflation and may need to be on a more aggressive path to hiking rates.

“Overall, standard policy rules suggest that the Fed is modestly to moderately behind the curve, but not to a degree that is comparable to the largest policy errors of the past or that could not be rectified by moderately faster tightening,” wrote David Mericle, a Goldman economist, in a recent note to clients.

In December, the Fed penciled in three quarter-percentage-point increases for 2017 and held to that pace, according to its so-called dot plot of projections for future rate hikes by Fed members.

Still, the market appeared ebullient at what it perceived as the Fed not taking the punchbowl away fast enough, with stocks ending firmly higher and the 10-year Treasury note TMUBMUSD10Y, +1.31% closing the session at 2.50% from 2.58% earlier in the session, with buying in government bonds pushing bond yields lower and prices higher.

That is an odd turn for the U.S. government-bond market, if traders are expecting richer-yielding bonds down the road.

But the market’s reaction may also be because investors mostly believe that the Fed is concerned about going too far, too fast and upending not just a raging bull market but also the economy as well.

Article Link To MarketWatch:

Yellen Calms Fears Fed's Policy Trigger Finger Is Getting Itchy

Policy makers still project three total rate hikes for 2017; FOMC sticks with ‘gradual’ plan for removing accommodation.

By Rich Miller, Christopher Condon, and Jeanna Smialek
March 16, 2017

Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest-rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation.

Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2 percent goal and that it intended to keep its policy accommodative for “some time.”

“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.

As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.

Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.

Speculation of a more aggressive Fed had mounted in recent days after a host of central bank officials, including Yellen herself, went out of their way to telegraph to financial markets that a rate hike was imminent. The expectations were further fueled by news of rising inflation.

Stocks Advance

Stocks rose and bond yields fell as investors viewed the statement from the Federal Open Market Committee and Yellen’s remarks afterward as a sign that the Fed isn’t in a hurry to remove monetary stimulus. The FOMC raised the target range for the federal funds rate to 0.75 percent to 1 percent, as expected, but Yellen’s lack of urgency to snuff out inflation was a surprise.

R.J. Gallo, a fixed-income investment manager at Federated Investors in Pittsburgh, said the chorus of Fed speakers before this meeting led investors to expect a move up in the number of projected rate hikes this year, and even upgrades by Fed officials in the levels of inflation and growth they anticipated.

None of that materialized.

“You didn’t get any of those things,” Gallo said, which explains why Treasury yields quickly dropped after the Fed released the FOMC statement and a new set of economic projections. “The expectation that Fed was getting more hawkish had to come out of the market.”

The U.S. economy has mostly met the central bank’s goals of full employment and stable prices, and may get further support if President Donald Trump delivers promised fiscal stimulus. Investor and business confidence has soared since Trump won the presidency in November, buoyed by his vows to cut taxes, lift infrastructure spending and ease regulations.

Still, the data don’t show an economy that’s heating up rapidly -- a point Yellen herself made after the third rate hike since the 2007-2009 recession ended. In fact, the economy may have “more room to run,” she said.

Stronger business and consumer confidence hasn’t yet translated into increased investment and spending, said Yellen.

“It’s uncertain just how much sentiment actually impacts spending decisions, and I wouldn’t say at this point that I have seen hard evidence of any change in spending decisions,” said the Fed Chair. “Most of the business people that we’ve talked to also have a wait-and-see attitude.”

Retail sales in February grew at the slowest pace since August, a government report showed earlier Wednesday. The Atlanta Fed’s model for GDP predicts an expansion of 0.9 percent in the first quarter, less than a third the pace Trump is aiming for.

Fiscal Stimulus

Asked about the potential for a fiscal boost, Yellen made clear the Fed is still waiting for more concrete policy plans to emerge from the Trump administration before adapting monetary policy in reaction.

“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”

Yellen disputed suggestions that the Fed was on a collision course with the Trump administration over its plans to foster faster economic growth through tax cuts and deregulation. “We would welcome stronger economic growth in the context of price stability,” she said.

She said she had met Trump briefly and had gotten together a couple of times with Treasury Secretary Steven Mnuchin to discuss the economy and financial regulation.

Further underscoring their lack of urgency, Fed officials repeated a commitment to maintain their balance-sheet reinvestment policy until rate increases were well under way. Yellen said officials had discussed the process of reducing the balance sheet gradually, but had made no decisions and would continue to debate the topic.

Policy makers forecast inflation will reach 1.9 percent in the fourth quarter this year, and 2 percent in both 2018 and 2019, according to quarterly median estimates released with the FOMC statement. The Fed’s preferred measure of inflation rose 1.9 percent in the 12 months through January, just shy of its target.

Yellen pointed out, though, that core inflation continues to run somewhat further below 2 percent. That rate, which strips out food and energy costs, stood at 1.7 percent in January. The Fed’s new forecast for the core rate at the end of this year edged up to 1.9 percent, from 1.8 percent in December.

“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said. Discussing the word symmetric in the statement, Yellen said during her press conference that the Fed was not shooting to push inflation over 2 percent but recognized that it could temporarily go above it. Two percent is a target, she reiterated, not a ceiling.

Article Link To Bloomberg:

In Trump’s Blueprint To Reorder The Federal Government, Echoes Of Reagan ’81

By Dan Balz 
The Washington Post
March 16, 2017

President Trump’s governing blueprint represents the most ambitious effort to cut domestic spending and pare back the federal government since former president Ronald Reagan came to Washington in 1981. Whether it will come close to accomplishing the president’s ambitions is a far different question.

Trump’s new budget proposes to raise discretionary defense spending by $54 billion in the next fiscal year and cut domestic discretionary spending by an equivalent amount, a sizable shift in priorities. To pay for his defense buildup, he would take huge chunks out of the budgets at the State Department, the Environmental Protection Agency and other agencies. The list of programs identified for elimination is lengthy, with targets both familiar and obscure.

The president’s ambitions go beyond the numbers in his new budget, however. Earlier this week, Trump signed an executive order designed to reorganize the executive branch. Unlike President Bill Clinton’s initiative to reinvent government, Trump’s order appears to be far more expansive, with a stated goal of finding programs and perhaps whole agencies that could be eliminated.

“Presidents create their own eras,” said John Samples of the Cato Institute. “If he did this — whatever he said in the campaign — you might see a different cycle going forward with more restraint and a reduction in the size of government. This could be the beginning of a new cycle, but he’s got to get from here to there.”

That caveat — “whatever he said in the campaign” — is not insignificant. Trump has emerged in his early weeks in office as a president with an agenda to tear down parts of the federal government that he sees as superfluous or hostile to his views. Stephen K. Bannon, White House senior counselor and chief strategist, has talked about the “deconstruction of the administrative state.”

As a candidate, Trump espoused some of the goals he is following now — cutting regulations, for example — but also promised to hold harmless programs such as Social Security and Medicare and pledged a health-care program that would provide coverage to everyone while also promising major tax cuts. If he sticks to those pledges, the impact on the deficit could be significant.

All this leaves open the question of what Trump’s true priorities are. Are they mainly to raise defense spending, thereby being forced to find offsetting savings from domestic spending? Are they to reduce the deficit significantly, in which case what he is proposing will not go very far? Are they to take an ax to the executive branch, both through regulatory changes and the elimination of programs, in an effort to fight a bureaucracy that he appears to see as hostile to his presidency?

“In terms of the overall change in direction, this is basically following the Reagan blueprint to reorder priorities in discretionary spending,” said former senator Phil Gramm (R-Tex.), who as a House member and “blue dog” Democrat played a key role in Reagan’s first budget battle. “It would be modest in any private entity, but in government, it’s significant.”

The domestic cuts proposed in Trump’s new budget will produce pain and are likely to spark the same kind of backlash that has greeted past efforts. Trump enjoys the advantage of having a Congress in Republican hands, and one that includes many members who came to Washington determined to cut government’s size and scope. But the built-in resistance to cuts in specific programs will test Trump’s ability to shift priorities and truly shrink Washington’s reach.

“There aren’t a lot of examples of presidents coming in and saying, ‘I’m going to eliminate this program and that program and cut a whole bunch of programs back anywhere from 10 to 30 percent,’ ” said Robert Reischauer, a former director of the Congressional Budget Office. “This is quite unusual.”

Reagan came to Washington determined to scale back the federal government. His 1981 budget and tax program did just that, cutting taxes dramatically and cutting overall projected government spending by about 5 percent and domestic discretionary spending by about 14 percent, according to Samples. When he left office after eight years, most of those programs he had cut had gotten bigger again, and those he tried to eliminate were still in existence.

The reason, said Leon E. Panetta, who was director of the Office of Management and Budget during Clinton’s administration, was the built-in obstacles that confront any president seeking to cut rather than spend.

“Deep down, despite a lot of rhetoric about cutting, members of Congress, both Republican and Democrat, are committed to areas of domestic spending, particularly those that affect their districts,” he said. “What it means is that defense will go up, but then there will be a real game of smoke and mirrors to find a way to somehow cover those costs.”

Panetta pointed out that successful efforts to attack the deficit combined cuts in defense and domestic spending, higher taxes and changes in entitlement programs. He cited the 1990 agreement between President George H.W. Bush’s White House and a Democratic Congress and the deal reached by Clinton’s White House and a Republican-controlled House that produced a balanced budget in the late 1990s.

But deficit reduction is not necessarily Trump’s top priority. His overall fiscal plan remains a work in progress. What is being released this week does not include his proposals to overhaul the tax code. But his campaign promises included cutting the corporation tax and reducing tax rates, including on wealthy individuals. The only way to increase defense spending, therefore, is to go hard after domestic spending.

Ohio Gov. John Kasich, who was chairman of the House Budget Committee at the time of the balanced budget deal, offered this cautionary note. “Slashing is the easiest thing to do,” he said. “Reforming is the hardest, but it pays the most dividends.”

Trump’s proposed domestic cuts come after a period in which those programs have been steadily squeezed as a result of the budget sequester that went into force during President Barack Obama’s administration.

Alice Rivlin of the Brookings Institution, a former director of the Office of Management and Budget and of the Congressional Budget Office, said domestic spending should be rethought rather than simply cut more. “We’re spending at record lows in comparison to the size of the economy and the population for all the domestic programs we need,” she said.

Trump’s order on reorganizing the executive branch could prove significant, if Mick Mulvaney, the new Office of Management and Budget director, fully picks up on the mandate in the directive. “It is a wide-open invitation for the OMB director to think big and to go after programs and to propose eliminations,” said Chris Edwards of the Cato Institute. “I expect it to be a very bold study.”

Elaine Kamarck of the Brookings Institution oversaw the government reinvention initiative during the Clinton administration, which was under the direction of Vice President Al Gore. “You have to tell big pieces of the government to stop doing stuff, and the only way to do that is to overturn statutes,” she said. “That’s why almost every effort has come far, far short. Despite many Republican administrations and Republican Congresses, the government is bigger than it ever was.”

She also said that finding substantial savings will be more difficult for the Trump administration than it was for Clinton and Gore. Many of the savings and efficiencies resulted from taking advantage of emerging technology, particularly the Internet. “We took most of those savings,” she said.

One priority of the new administration appears to be to change the relationship between Washington and the states and cities by devolving power away from the federal government. That was one of Reagan’s goals.

Many governors are anxiously watching the early moves of the Trump administration, wondering whether changes in programs, whether big-ticket ones like Medicaid or smaller programs targeted for elimination, will put greater burdens on the states unless there is significantly more flexibility built in.

“It’s very much a zero-sum game at the state level,” said Scott Pattison, executive director of the National Governors Association. “It’s not like there are pots of money sitting around that can move in. If grants are cut to state and local governments, something has to give.”

Finally, the priorities of many Republican congressional leaders and Trump’s more populist supporters may not always intersect. That, too, will be one of the balancing acts the president must manage. Gramm said successful administrations are the ones that follow the process diligently through to the end. Trump is only at the beginning.

Article Link To The Washington Post:

Military Wins In First Trump Budget; Environment, Aid Lose Big

By Roberta Rampton
March 16, 2017

President Donald Trump will ask the U.S. Congress for dramatic cuts to many federal programs as he seeks to bulk up defense spending, start building a wall on the border with Mexico and spend more money deporting illegal immigrants.

In a federal budget proposal with many losers, the Environmental Protection Agency and State Department stand out as targets for the biggest spending reductions. Funding would disappear altogether for 19 independent bodies that count on federal money for public broadcasting, the arts and regional issues from Alaska to Appalachia.

Trump's budget outline is a bare-bones plan covering just "discretionary" spending for the 2018 fiscal year starting on Oct. 1. It is the first volley in what is expected to be an intense battle over spending in coming months in Congress, which holds the federal purse strings and seldom approves presidents' budget plans.

Congress, controlled by Trump's fellow Republicans, may reject some or many of his proposed cuts. Some of the proposed changes, which Democrats will broadly oppose, have been targeted for decades by conservative Republicans.

For a graphic on winners and losers in Trump's budget, click here

Moderate Republicans have already expressed unease with potential cuts to popular domestic programs such as home-heating subsidies, clean-water projects and job training.

Trump is willing to discuss priorities, said White House budget director Mick Mulvaney, a former South Carolina congressman who made a name for himself as a spending hawk before Trump plucked him for his Cabinet.

"The president wants to spend more money on defense, more money securing the border, more money enforcing the laws, and more money on school choice, without adding to the deficit," Mulvaney told a small group of reporters during a preview on Wednesday.

"If they have a different way to accomplish that, we are more than interested in talking to them," Mulvaney said.

Trump wants to spend $54 billion more on defense, put a down payment on his border wall, and breathe life into a few other campaign promises. His initial budget outline does not incorporate his promise to pour $1 trillion into roads, bridges, airports and other infrastructure projects. The White House has said the infrastructure plan is still to come.

The defense increases are matched by cuts to other programs so as to not increase the $488 billion federal deficit. Mulvaney acknowledged the proposal would likely result in significant cuts to the federal workforce.

"You can’t drain the swamp and leave all the people in it," Mulvaney said.

'America First'

White House officials looked at Trump's campaign speeches and "America First" pledges as they crunched the numbers, Mulvaney said.

"We turned those policies into numbers," he said, explaining how the document mirrored pledges to spend more on the U.S. nuclear weapons arsenal, veterans' health care, the FBI, and Justice Department efforts to fight drug dealers and violent crime.

The Department of Homeland Security would get a 6.8 percent increase, with more money for extra staff needed to catch, detain and deport illegal immigrants.

Trump wants Congress to shell out $1.5 billion for the border wall with Mexico in the current fiscal year - enough for pilot projects to determine the best way to build it - and a further $2.6 billion in fiscal 2018, Mulvaney said.

The estimate of the full cost of the wall will be included in the full budget, expected in mid-May, which will project spending and revenues over 10 years.

Trump has vowed Mexico will pay for the border wall, which the Mexican government has flatly said it will not do. The White House has said recently that funding would be kick-started in the United States.

The voluminous budget document will include economic forecasts and Trump's views on "mandatory entitlements" - big-ticket programs like Social Security and Medicare, which Trump vowed to protect on the campaign trail.

Biggest Losers

Trump asked Congress to slash the EPA by $2.6 billion or more than 31 percent, and the State Department by more than 28 percent or $10.9 billion.

Mulvaney said the "core functions" of those agencies would be preserved. Hit hard would be foreign aid, grants to multilateral development agencies like the World Bank and climate change programs at the United Nations.

Trump wants to get rid of more than 50 EPA programs, end funding for former Democratic President Barack Obama's signature Clean Power Plan aimed at reducing carbon dioxide emissions, and cut renewable energy research programs at the Energy Department.

Regional programs to clean up the Great Lakes and Chesapeake Bay would be sent to the chopping block.

Community development grants at the Housing Department - around since 1974 - were cut in Trump's budget, along with more than 20 Education Department programs, including some funding program for before- and after- school programs.

Anti-poverty grants and a program that helps poor people pay their energy bills would be slashed, as well as a Labor Department program that helps low-income seniors find work.

Trump's rural base did not escape cuts. The White House proposed a 21 percent reduction to the Agriculture Department, cutting loans and grants for wastewater, reducing staff in county offices and ending a popular program that helps U.S. farmers donate crops for overseas food aid.

Article Link To Reuters: